Nov 09, 2012 03:09 PM IST | Source: CNBC-TV18

UBS cautious on PSU banks, FIIs ready to bet on India

Suresh Mahadevan, managing director and head of Indian equities, UBS Securities is in no mood to bet on State Bank of India (SBI) ahead of its second quarter results announcement.

Suresh Mahadevan, managing director and head of Indian equities, UBS Securities is in no mood to bet on State Bank of India (SBI) ahead of its second quarter results announcement. India's largest lender the SBI is likely to report nearly 29% jump in its second quarter (July-September) net profit to Rs 3,615.1 crore. Net interest income (NII) or the difference between interest earned and paid out, may grow a little more than 12% to Rs 11,680 crore on standalone basis, according to a poll estimate by CNBC Awaaz.

"It is a stock where we have not been positive historically and that strategy has paid off well in the past. Private sector banks have outperformed the PSUs by a significant margin," Mahadevan told CNBC-TV18 in an interview.

Below is an edited transcript of the interview on CNBC-TV18

Q: What are your expectations from SBI today?

A: We have not been very positive on the whole PSU bank pack and that includes SBI. We have fundamentally not a very positive view on the name, but having said that, there is some chatter that results maybe better etc. However, we will have to wait for the event. Clearly, it is a stock where we have not been positive historically and that strategy has paid off well in the past. Private sector banks have outperformed the PSUs by a significant margin.

Q: In the last couple of days global markets have been terrible, but we have held out quite well. To whom do you attribute this resilience?

A: The resilience could be attributed to two things. One is earnings overall, though individually there have been bits and misses but overall has been okay. Two, a trend I am picking up is people are increasingly becoming at the margin more positive on India. These are people who have a choice whether it is Global Emerging Markets (GEM) or global people.

Also there is a fair amount of pessimism on China which seems to be helping us as we are seen with China. So, I can attribute it to those two things. But we think this market is still cheap. If you look at the Nifty EPS of Rs 430 for FY14 the market is trading at a little over 13 times. So there is definitely scope to move up to a 15 times earnings. We are constructive on the market at these levels. 

Q: Tata Steel also announces results today. What are your expectations?

A: I do not remember the number, but we have not been very positive on the metal names. We have one name Hindalco in our portfolio and other than that we have not been very positive on metals, because of the nature of global economy, particularly China, the growth slowdown there. So we have been a little cautious on the metals pack, but specific to Tata Steel I do not remember the number at this point.

Q: What is your general sense from this earnings season? Did you take away a bit of comfort that earnings may have already troughed out?

A: Yes, that is certainly the case. At the margin the earnings have been quite alright. We were thinking that this quarter maybe, seasonally also it is not great, but in the end when the numbers came up it seems quite alright.

Q: What do you hear from your global clients on the sales desk? If there is any kind of dips in the Indian market because of global events, would they actually utilize those dips to be accumulating stocks here?

A: Yes, I would think so. Certainly we have been buyers at the margin for a while and people are obviously now looking beyond the consumer pharma sectors to look for opportunities in some of the other names. So, people are quite happy listening strong bottom-up stories even though they may not be very large cap. So that way we find quite a bit of interest. I think one theme which is particularly caught on is the digitization theme, where we get a lot of queries, stocks like Sun, Zee, Dish. So that is one area where there seems to be a fair amount of interest. So themes, bottoms, stories, people are quite keen to listen to them.

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Q: Are they in serious profit taking mode in FMCG and pharmaceuticals, because pharma stocks continue to move higher?

A: No, not yet, that is what is surprising. As long as the numbers are delivered people do not want to sell, because some of these stocks have done very well and people may believe they may continue to do well. So that switch has not happened yet, but it may happen at some point. If the markets were to do a further rally of 10-15 percent then I would assume some level of switching may happen, but surprisingly it has not happened much yet.

Q: Which sectors are you pushing to your clients where valuations are not very stretched? On the performing sectors, IT, FMCG, pharmaceuticals, valuations are not inexpensive but in some of the sectors which are not yet fancied, can you tell us with respect to earnings where you can push a strong buy?

A: Yes, we are still pushing private sector banks particularly ICICI Bank, IndusIand Bank, Federal Bank, that we continue to like. In infrastructure we like L&T, BHEL maybe okay given how cheap it is at this level. We have been asking people to look into real estate at least because when policy rates start to decline, this sector may do well. Telecom is another sector where we are on a contrarian basis very positive. So these are some sectors we are quite positive on.

Q: You mentioned L&T but a lot of investors got in early in names like Crompton Greaves and Voltas expecting that a turnaround is going to come sooner than later, but would results there have disappointed you?

A: I think results are one data point but if you are looking at a mild cyclical recovery from the trough of 5.5 or maybe slightly lower. I do not know what the coming quarter is going to throw up in terms of economic growth but then companies like L&T should benefit because these things move on order flow. If due to rate cuts and some policy measures, the investment cycle gets revived then a company like L&T would emerge as a key beneficiary.

Q: My question was more on names like Crompton Greaves which disappointed this time?

A: Crompton we have been quite negative and rightly so. I do not think we have changed our view there. We continue to be negative. Voltas we have been positive on at the margin. So for Crompton Greaves we have had a negative view for a while since the last 18 months and I think it has played out quite well.

Q: Is Exide the other stock which is well owned institution from the midcap space, where this quarter’s numbers did not go down well?

A: Yes, Exide is a name where we are positive. It was discovered by our midcap team and the positive there is primarily the dominance in the four-wheelers that could be translated into two-wheelers. As we think particularly with scooters probably doing quite well or would continue to do well because a lot of women want to buy two-wheelers. Then, Exide as an opportunity because women are going to use the push-start, so we think that is a longer-term opportunity in the stock and continue to like it despite the quarter being not as great.

Q: What are your top picks in the auto space now?

A: In autos, we have Maruti and Hero Honda in our portfolio. Maruti has done quite well. Hero has been okay, it is out there. There are some concerns around competition from Honda, how much would they spend on R&D? But we still like the story here because the company has enough competitive advantages to mitigate some of the risks that are coming out. So those are the two names we like.

Q: Do you have United Spirits under coverage?

A: United Spirits, currently we have coverage on it. This coverage is kind of suspended so I will not be able to comment much on United Spirits at this point.

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Q: What is your expectation for 2013 calendar? Do you expect the next quarter earnings; the January reported earnings to be better than the current quarter? Will the market get a sense that the earnings have slowly started improving on the margin?

A: Yes, quite possible because seasonally it is a strong quarter. The way this quarter has moved so far, we have seen 65-70 percent of the company’s report and it is quite a progress card. So yes, that is quite a possibility. Next quarter’s earnings will be better than this quarter for sure. Secondly, at some point we are going to see policy rate cuts. That is certainly going to be a catalyst for the markets and also to the economy upto an extent.

So, that is something we need to watch out for. It could provide a third leg to the rally. The first leg being the unified central bank action, second being the Indian government trying to push through reforms and third will come and you get the RBI to cut rates, which is a question of when as opposed to if they will cut the rates.

Q: According to you what is the key risk to this market now?

A: The key risks are around next year’s budgets and some of the reforms need parliamentary approvals. So, it seems the parliament has been dysfunctional in the past. We will have to see how much of negotiation ability the Congress government has to push through some of the long overdue reforms. So, if you become totally populist from the budget onwards then there is a risk. I am sure there are expectations already built in for a populist budget to be presented in February 2013. So that is a big risk from an Indian perspective other than the global risk which still remain because we are pretty much a high beta market. So to that extent risk-on is good for us.

Q: There are some names which are heavyweights, which have done nothing for the Nifty despite it doing quite well this year, stocks like Reliance and ONGC which continue to grind in a range. Do you see any possibility of them breaking out next year?

A: Our analysts are certainly positive. After being underweight for the last couple of months, I have been neutral on Reliance because it is at a level where things could do well. Particularly if they get an increase in the gas price, that certainly will be positive catalyst for the stock. ONGC is a bit difficult because ONGC along with some of the oil marketing companies is always difficult to call as they are quite subject to the government policy, which can be random. So we are obviously more constructive on Reliance than ONGC. It is certainly a stock to watch out for next year because it has underperformed the markets significantly.

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